Environment Editor, The Sydney Morning Herald

Demand response may soon be a bigger feature of the eastern states' power market. Photo: Jessica Shapiro

On a recent Tuesday afternoon, about 300 companies at 475 sites across the south and west of Western Australia agreed to cut electricity usage for two hours and get paid for it.

Demand for power on WA's Wholesale Energy Market duly dropped by about 250 megawatts, or roughly 6 per cent of the market's capacity.

The demonstration was conducted by energy management company EnerNOC, which is required to show it can call on clients to cut demand – with four hours' notice – when needed to help the state's power sector handle demand spikes.

"In WA, demand-side operators are treated the same as a peaking plant," said Paul Troughton, manager of EnerNOC for Australia and New Zealand. Annual payments to participants range from "thousands of dollars to the hundreds of thousands".

Paying companies to aggregate customers who are willing to curtail power demand at critical times is starting to win favour in the eastern states.

The Australian Energy Market Commission's (AEMC) final Power of Choice report last month named demand-side participation as its top recommendation, and last week's Council of Australian Governments meeting also gave it a tick of approval.

While the National Energy Market (NEM) serving the eastern states won't operate quite the same way as WA's, the prospect companies will be permitted to bid so-called "nega-watts" into the wholesale market is a big lure for companies such as EnerNOC.

"The opportunity in the NEM is among the most promising in the world," said Kenneth Schisler, vice president for regulatory affairs at EnerNOC, noting demand response now accounts for less than 1 per cent of the NEM and as much as 12 per cent in WA.

Mr Forrest said existing demand response on the NEM is limited to fewer than 100 sites although ERM has managed to increase its client base by about 40 per cent in terms of megawatt capacity in the past six months. "Opportunities are there to be grabbed now," he said.

Carrot vs stick

The possibility more states will follow Victoria and roll out smart meters – which allow consumers to sign up for variable power prices – is unlikely to deliver the peak-demand reductions authorities are hoping for, Dr Troughton said.

For instance, during the February 2, 2011 peak on the NEM, about 60 per cent of demand came from customers already using interval meters.

With only 40 per cent of users unable to respond to price changes now, "it makes more sense to engage with the 60 per cent first", he said.

To get residential users to turn down air-conditioners on a hot day, by contrast, would require "a very powerful deterrent" that many consumers will resist, Mr Schisler said.

EnerNOC, ERM and other rivals, though, may have to wait some time for authorities to act on the AEMC's recommendations for market changes.

Authorities will need to draw up rules to allow third-party entry in the demand-response market, such as how much warning users who agree to curb demand will get before they have to shut down a production line or take other steps.

ERM's Mr Forrest said his firms' clients sign up for curtailment plans ranging from as short as 10 minutes to as long as one day or more. The users may be called on to curb demand as many as 12 times a years.

With political support behind it, the expansion of demand response may come sooner than the July 2014 timetable now being considered, Dr Troughton said.

Opposition to the move, though, may also come from retailers – particularly those with generation capacity – which have little incentive to see demand curtailed.